Income Protection For Self Employed

How Does Self Employed Income Protection Work?

A Self Employed Income Protection policy works pretty much in the same way as personal one. As mentioned above, if you’re unable to work due to accident or sickness, a policy would pay out a monthly benefit until you’re fit enough to return. This benefit can then be used to cover your monthly outgoings.

Where the difference presents itself is how a policy is paid for. If you operate through your own limited company, you can opt for ‘Executive Income Protection‘. With this particular type of policy, rather than you paying for the premiums out of your own bank account, your company can pay for them. Because of this, there are some tax benefits which we’ll talk about later.

Policy Factors To Consider Before Taking Out A Policy

There are a number of policy factors to consider when taking out Self Employed Income Protection. These will impact what your policy looks like and how much it costs. We’ve provided the key factors below.

How Much Cover Do I Need?

The level of cover is the monthly amount that will be paid out should you need to claim. The higher the figure, the more your premiums will cost.

You can insure a maximum of 70% of your gross (pre-tax) self employed income. Most providers will insure between 50% and 60% of your income, though.

If you’re a sole trader, you can figure out your gross income by taking your total revenue and subtracting business costs (materials, for example). This is the figure you pay tax on and also what you base your level of cover on.

What Is A Deferred Period?

You need to choose a deferred period when setting up your policy. A deferred period refers to how long you can wait for the insurer to pay out if you can’t work due to accident or sickness.

The longer your deferred period, the lower your premiums. For example, a 13 week deferred period can cut premiums by up to 50% when you compare it to a 4 week deferred period. The shortest deferred periods are 1 week, while the longest are 12 months.

By extending the deferred period of your Income Protection policy to align with your savings or any available sick pay, you can significantly lower your monthly premiums.

Just ensure that your financial buffer is robust enough to support you during this extended waiting period before benefits kick in.

Sophie Guiver
Independent Protection Expert

How Long Should Your Cover Last?

From the outset you will need to set an age for your Self Employed Income Protection policy to end. You usually link this with your retirement age or when you expect to be financially secure. Many providers offer a cease age up to 70, however the older your cease age, the higher your premiums will be. This is due to the increased risk of you becoming unwell and needing to make a claim.

Do You Need Short Term Or Long Term Cover?

In the event of a claim, short term cover will pay out for a limited amount of time, regardless of whether you are well enough to return to work. Long term cover however, will continue to pay out until the end of your policy should you not return to work.

• Short Term Cover
  Short-term policies only pay out for up to 1, 2 or 5 years per claim. While it’s a cheaper option, a time limit works against you if you become so ill you can’t go back to work.
• Long Term Cover
  Long-term cover, on the other hand, is unlimited. It’s more expensive, but pays out up until retirement if your illness or injury stops you from working again.

Considering leading insurer Aviva had an average claim length of 6 years and 9 months in 2023, it makes sense to pick long term cover if budget suffices.

Should I Choose Guaranteed Or Age Banded Premiums?

When taking out Income Protection cover you have a number of premium types to choose from:

• Age-banded
  Your premiums will rise each year in line with your age, based on a preset amount in your policy documents. The increase is solely linked to your age and the growing risk of you claiming as you get older
• Reviewable
  Insurers can adjust rates as deemed necessary, potentially increasing due to factors like a rise in claims or economic changes. While initially more affordable, these premiums may ultimately become costlier over the duration of the policy
• Guaranteed premiums
  The insurer cannot increase premiums unless you change the plan. While this has its benefits, it’s not suitable for everyone. For instance, manual workers often get better rates with age-banded premiums, so don’t discount anything until you’ve examined all your options.

Definition Of Incapacity

Another important factor to consider when taking out Self Employed Income Protection is the ‘Definition of Incapacity’ a provider uses. This is what an insurer uses to determine whether you are fit enough to return to work.

There are three different types that you will come across. Which one your policy refers to will determine if a claim gets paid or not, so it’s important to understand how they differ.

• Own Occupation
  Imagine you’re an architect, and a hand injury keeps you from bringing your blueprints to life. That’s where Own Occupation Cover steps in, offering protection specifically when you can’t perform in your unique role due to injury or illness. As a definition it ensures your specific skills are safeguarded.
• Suited Occupation
  With this particular definition, to qualify for a payout, you need to be unable to perform not only your current job but also any other role for which your experience has prepared you for. So, if you can’t fulfil your present responsibilities but are capable of working in another position that aligns with your skill set, suited occupation cover won’t kick in.
• Any Occupation / Work Tasks
  Claiming under this category means proving you’re unable to engage in any work or perform basic job-related tasks. It’s the broadest form of cover, designed for those who find themselves unable to undertake any form of employment. While it offers the widest net, it’s also the most challenging to claim, so tread carefully.

We always recommend Own Occupation Cover because it provides the most comprehensive and specific protection.

This type of cover ensures that if you’re unable to perform in your specific professional role due to illness or injury, you’re eligible for support. With the other definitions claiming may not be as straight forward.

Samantha Haffenden-Angear
Independent Protection Expert

What Does Income Protection For Self Employed Cover?

Self Employed Income Protection Insurance is a highly comprehensive form of protection. It covers almost every medical condition that prevents you from working, including, but not limited to:

• Back conditions and other musculoskeletal issues
• Depression and mental health conditions
• Heart attacks & heart disease
• Cancer, stroke and other serious illnesses.

Are There Any Exclusions?

As with all types of insurance, there are some blanket exclusions which apply to everyone.

For example, you can’t usually claim for illnesses / injuries sustained:

• Due to criminal activity
• From illegal / illicit drug use, substance abuse or alcohol misuse
• During overseas travel to areas of active internal conflict, high terrorism risk, political instability or countries the Foreign and Commonwealth Office (FCO) has advised against visiting.

Does It Cover Pre-Existing Conditions?

When you set up your Self Employed Income Protection, the insurer will ask you to declare any existing medical conditions. If you have any pre-existing conditions, the insurer will do one of the following depending on the severity:

• Cover the condition on standard terms (you won’t face any difference in price or terms compared to a healthy individual)
• Cover the condition for an additional premium
• Exclude the condition but offer a date at which it will consider reviewing the exclusion
• Exclude that condition entirely (perhaps with a premium discount to compensate).

Getting cover for a pre-existing condition can be tricky. Fortunately, our team of experts know the UK market and each insurer inside out. So we understand which Self Employed Income Protection policies may offer more lenient terms depending on your circumstances.

That’s why it’s worth talking things through with an expert — don’t hesitate to pop us a call on 02084327333 or email us at help@drewberry.co.uk.

Additional Benefits & Support Services

Another important area of comparison is the additional benefits on offer from various Income Protection insurers. These are services available, almost always for free, alongside the core accident and sickness insurance.

Insurers have designed many such benefits with overall wellness in mind. You can therefore use them to reduce the chances of you needing to claim or to help speed up your recovery if you are ill. Additional benefits may include:

• 24/7 Virtual GP service
• Prescription service
• Medical helplines
• High street discounts
• Discounts on gym memberships / fitness trackers
• Second medical opinion service

Many of the services above are available to not only you as the income protection insurance policyholder but also your immediate family, such as your spouse / civil partner or dependent children.

Do I Need Self Employed Income Protection?

Whether or not you need protection or not is down to your own personal circumstances. However there are a number of questions you need to ask yourself:

• Could you continue to cover your monthly outgoings if your income stopped?
• Could you survive on savings or state benefits?
• What are the actual risks of you becoming ill?

Are Self Employed People Entitled To Statutory Sick Pay?

A full-time employee is usually entitled to up to 28 weeks of Statutory Sick Pay from their employer if they’re off sick. This is worth £109.40 per week. Many employers offer more than this as standard, though.

If you’re self-employed you don’t get this benefit. Instead, you may be able to claim government incapacity support, known as Employment and Support Allowance. This is up to £84.80 a week for over 25s.

There are other government benefits available depending on the severity of your illness. However, these are rarely sufficient to replace the average weekly UK household expenditure of £528.80 (2021/22).

What’s The Risk of Illness Or Injury?

The Office for National Statistics figures reveal that around 2.7 million people were ‘economically inactive’ due to long-term sickness between Oct and Dec 2023.

Clearly, these are long-term disabilities that go beyond your usual coughs and colds, or even broken bones, if they’re keeping people off work for months.

That’s why Self Employed Income Protection can be so important. After all, if you’re working for yourself, you have less government support than employed people and fewer employee benefits.

Finance Blogger Mrs Mummypenny Recommends Income Protection…

This is why self-employed finance blogger Mrs Mummypenny took out Income Protection. She wanted the valued peace of mind that you and your family get when you know your monthly income is protected.

How Much Does Self Employed Income Protection Cost?

What you pay for income protection when self employed will depend on a number of personal and policy factors. To give you an idea of cost we have provided some examples below. These are based on:

• A healthy 35 year old
• Non-smoker
• In an office based job
• 4 week deferral period
• Wanting a £2,000 benefit cover
• Long term cover with cease age of 65.

We calculated these prices using our Income Protection quote tool.

Provider

The first thing to bear in mind is that each provider will charge you different premiums, even if the cover is pretty much identical. This is because each will have their own appetite for risk and charge differently based on this.

Providers
£49.22	£53.28

Quotes correct as of Feb 2024

The Deferred Period

The longer the deferred period you opt for, the cheaper your premiums will be. Based on the above policy options, we’ve provided example costs from Aviva for various different periods below.

Short Term Vs Long Term Cover

The level of cover you choose will also impact cost. For example a short term policy will be cheaper than a long term one. However, it’s important to remember that short term policies won’t provide the same comprehensive cover as a long term policy.

Your Age

As we get older, we become more likely to suffer an injury or fall ill. Older people therefore face higher Income Protection premiums. The earlier you take out a policy, the cheaper it is.

Smoker Status

Being a smoker means you’re more likely to get ill, and more seriously ill, than a non-smoker. Most insurers (although not all) charge smokers higher premiums.

Your Health / Medical History

Depending on your health and insurer, you may face higher premiums if you have a pre-existing condition or an adverse medical history.

Your Occupation

Some jobs involve more risk than others. For example, manual workers are more likely to have an accident on the job than office workers. The physical nature of manual work also means you’re more likely to be unable to work due to an illness or injury.

For this reason, those in riskier jobs pay more for their Self Employed Income Protection insurance.

How Does HMRC Tax It?

How HMRC taxes Income Protection for self employed individuals, will depend on how you work and how you pay for the policy.

For Company Directors and Contractors

As mentioned, if you work through your own limited company as a contractor or director, there are executive policies where your company can pay for the Income Protection.

In this case, premiums are eligible for corporation tax relief. But as you don’t pay tax on premiums, HMRC taxes the benefit instead when you make a claim. It’s therefore important to gross up the benefit (insure yourself for a higher figure so you get the correct net amount of tax) to compensate.

For Sole Traders

If you’re self-employed without a limited company, then there’s no ‘entity’ to own and pay for the policy on your behalf.

Sole traders must pay for Income Protection personally, from their own bank account. You typically can’t claim protection insurance policies as a business expense.

However, with personal protection, insurers pay claims tax-free as you pay premiums using income HMRC has already deducted tax from.

Is Self Employed Income Protection A P11D Benefit?

Some benefits that are provided by employers are classed as a P11D / Benefit In Kind by HMRC. What this means is that the employee receiving the benefit has to pay additional tax on it. For example with Company Health Insurance.

If you’re company is paying for your Income Protection, the good news is this particular benefit isn’t classed as a P11D/Benefit In Kind, so there will be no additional tax to pay.

How Do I Make A Claim? Will It Payout?

When making a claim it is best to make the insurer aware as soon as you become too ill or injured to work. You will need to complete a claims form and the insurer will assess the medical evidence to approve it.

We have a claims team to support you through this process and make it as smooth as possible so you can focus on your recovery.

Neil’s Cancer Claim With British Friendly

Neil is a client of Drewberry™ and took out a Income Protection policy when self employed with British Friendly. He was a member for 4 years before he needed to claim.

Unfortunately, he became unwell and had pains in his stomach. After consulting his GP and having further tests, Neil was diagnosed with Stage 2 Bowel Cancer and needed to make a claim. Find out more about Neil’s claim 👇

Which Insurers Pay The Most Claims?

Most self employed people want to choose cover by picking the insurer that’s most likely to pay out when they need it the most.

However, it’s actually fairly hard to distinguish one provider from another in this area. Payout rates across the industry are not only higher than many assume but are also fairly uniform.

For example, as you can see in the table below, most insurers pay more than 90% of all claims they receive.

Who Is The Best Self Employed Income Protection Provider In The UK 2024?

As an independent insurance broker we compare all of the top UK insurers for our self-employed clients. Where we all have different jobs, varying medical history and lifestyle choices the best insurer truly does depend on your personal circumstances.

That’s because each insurer is different and prefers different risks. For example, some are more competitive for higher-risk / manual occupations, while others are better if you want a longer deferred period. We’ve outlined some of the best providers below:

• Aegon
• Aviva
• British Friendly
• Cirencester Friendly
• Holloway Friendly
• Legal & General
• Liverpool Victoria (LV=)
• Royal London
• Shepherds Friendly
• The Exeter
• Vitality
• Zurich.

Be aware that it’s not always the cheapest plan that’s the best — policies and providers vary considerably. One might offer a great deal more coverage than the other, so it pays to shop around.

We compare all the leading UK insurers for our clients to make sure they are getting the most cost-effective cover for their personal circumstances.

Compare Self Employed Income Protection Quotes & Get Expert Advice

With fluctuations in earnings and often a broad range of work duties, it can be a bit of a minefield for self-employed workers to set up Income Protection insurance.

That’s why we’re here to make sure you have all the information you need to make an informed decision and arrange the most suitable protection for your needs.

For help and fee-free Income Protection advice, pop us a call on 02084327333 or email us at help@drewberry.co.uk.

Why Speak to Us?

We started Drewberry™ because we were tired of being treated like a number.

We all deserve a first class service when it comes to issues as important as protecting our health and our finances. Below are just a few reasons why it makes sense to talk to us.

• There is no fee for our service
• We are an award winning 🏆 independent insurance broker who works with all the leading UK insurers
• You’ll speak to a dedicated expert from start to finish
• We are very proud of the 3893 and growing independent client reviews rating us at 4.92 / 5
• Claims support when you need it most.
• We are authorised and regulated by the Financial Conduct Authority. You can find us on the financial services register here 🧐